Godrej Consumer Products' Q2FY20 results (Neutral) - Recovery in HI & International margins

Q2FY20 result highlights

• Consolidated rev declined by 1.3% yoy to Rs26.1bn (est: Rs26.2bn); EBITDA grew by 18.2% yoy to Rs5.5bn (est: Rs5.35bn) and Adj PAT grew by 7.3% yoy to Rs3.84bn (est Rs3.64bn).
• Comparable CC cons. rev. grew by 3% yoy, with India business revenue growth at 1% yoy (est: 1.5%) and International business comparable CC sales (adj. for divestment of Europe business) grew by 7% yoy (comparable/reported international business rev grew by 4%/fell by 4% yoy).
• India sales up 1% yoy with volume growth of 7% yoy (est: 6% yoy). In terms of segments, HI rev. grew by 4% yoy. Soaps fell 4% due to heavy discounting; Hair color sales grew by 2% yoy. Indonesia grew by 13% cc yoy while GAUM fell by 2% CC yoy. Other geographies comparable CC growth stood at 38% yoy.
• Consolidated gross margins were up 370p yoy (standalone gross margin fell by 120bp yoy). Cons. staff cost increased by 8.3% yoy. Cons. A&P spends were down 16.6% yoy (standalone A&P down by 22% yoy). Resultant cons. EBITDA margins were up 360bp yoy at 21.3% (standalone EBITDA margins up 20bps yoy to 24.8%).

Key positives: India volume growth & gross margin expansion in International business.

Key negatives: India value growth & gross margins.

Impact on financials: No material change in estimates.

Valuations & view

GCPL’s performance was better than expectation with domestic volume growth of 7% (better than peers) and healthy recovery in international business profitability. Management expects domestic growth rate to improve in coming quarters aided by recovery in HI, share gains in soaps and focus on innovations. Further, it remains optimistic on uptick in Africa business which coupled with steady Indonesia business performance should aid overall consolidated performance. Given the positive management commentary, recovery signs in two key pain points – HI & Africa business, we have further  increased our target multiple to 40x (from 39x earlier). However, valuations at 47x/40x FY20/21E adequately captures the positives (implies India segment is already trading at 45x FY21E), hence we maintain our Neutral rating. We would monitor the pace of recovery in International business and further diversification of the India business, to change our stance.